Calculating costs of the carbon tax
There are opportunities in a de-carbonised economy but even offset and renewable energy stocks have their drawbacks, writes David Potts.
There are opportunities in a de-carbonised economy but even offset and renewable energy stocks have their drawbacks, writes David Potts. For all the angst the tax on carbon is causing Julia Gillard, how ironic that's not what it actually is.It's a permit to pollute - just like getting a licence to drive - for a fee. Who calls that a tax?In this case it's a fee for emitting carbon dioxide.The only difference is that the pollution permits can be bought on the international market (the real reason for Treasury saying the economy won't grind to a halt), though that seems to be the case with some driver's licences too, if you get my drift.Anyway, it's a funny tax where a government hands back more than it raises.No wonder it's hard to get a handle on who are the winners and who are the losers.The biggest "losers", for example, will be so heavily compensated, they're hardly worse off at all.Steel producers should take a king hit but, as broker RBS Morgans points out, the industry "is effectively exempt for the first four years" because of government help.Toll Holdings would have been a loser except the trucking industry will be exempt for another three years.Miners, RBS Morgans says, will only suffer a 1 per cent to 2 per cent fall in net profit from 2012-13. The dollar could do more damage than that in a day.The airlines? No worries, Qantas has already said it will pass the cost on to passengers.Gas and electricity utilities "may have to bear some additional costs in the near term but longer term there should, ultimately, be full pass through," RBS Morgans says. Yep, more price rises.Building materials groups such as CSR, Boral and Adelaide Brighton will suffer and the Housing Industry Association estimates a carbon price will add an average $5500 to the cost of a house.So don't fly, build a home or turn on the airconditioner and you'll be fine.Oops, forgot food. Prices will rise but, hey, what was that diet you were thinking about?Winners would have to be companies that can sell carbon credits and all this puts a new perspective on those dodgy, I mean tax-dodging, June 30 tree-plantation schemes.The share price of Carbon Conscious (ASX code CCF), which makes a tiny profit, doubled in the run-up to the carbon "tax" because it grows mallee-eucalypt trees across the more barren parts of Western Australia's wheat belt. It's already sold carbon credits to Origin Energy - supposedly a big loser but which, like all power companies, will be handed a swag of free permits - and BP.How about CO2 Group (COZ), which also grows trees, or what it calls "dedicated carbon sink plantings"? Like Carbon Conscious, it's debt-free but veers between a tiny loss and profit whenever it reports.Also, green chips - the renewable energy stocks - are winners but you don't want to be starry-eyed. Speculating on them is fine but, for an investment, they need to be well run with strong balance sheets, a proven technology and not continually calling for more capital.Unfortunately, most green chips fall foul on at least one of these.The well-regarded Infigen, for example, has wind farms but borrows big."The renewable energy sector has cross-currents," says Trevor Thomas, managing director of Ethinvest, financial advisers that specialise in ethical investments. "A company is at the early stage of commercialisation or it has a fair bit of debt."Either way, they're risky.Relying on government handouts comes with its own perils."The stroke of a bureaucrat's pen can make or destroy a company," Thomas says.But the biggest problem is that the carbon price needs to be $60 a tonne before it is profitable for electricity generators to switch from coal to gas and renewable energy.A final drawback is that there are myriad competitors around the world trying pretty much the same thing.Still, for the green chips there's something that's possibly even better than a carbon price.Under a direct action plan, curiously supported by both political sides but anathema to the Productivity Commission, 20 per cent of all power used by 2020 - which would be the three 20s if we lived in China - must be from renewable energy.In fact, there's already an emissions trading scheme up and running for renewable energy certificates that the power companies have to buy.It's had mixed success because state governments were paying too much for solar power fed into the grid from private homes, which has depressed the prices of the certificates. So the power companies have, for a song, picked up enough to last them another three years.Green chips to watchCBD Energy recently sold its wind farm management business into a joint venture with China, which also has a renewable energy target and where it has impressive connections. CBD mainly installs solar panels but its graphite battery that can store energy from wind is attracting interest. It has little debt and even makes a profit.Carnegie Wave Energy has world-leading technology in harnessing waves but is yet to be commercialised.Ceramic Fuel Cells has developed portable power generators that will generate electricity on site from natural gas. The company's burning through cash, though at a declining rate.Dyesol is a solar energy company with a difference it doesn't need much sun. It uses photosynthesis from a special dye that is cheaper than traditional solar cells and only needs low light. But it's up to five years from commercialisation and relies heavily on government grants.Geodynamics has developed new but unproven technology that would use hot rocks in the Cooper Basin, where Origin is its partner, to generate power. The firm's yet to generate any revenue but has $29 million in cash.Panax Geothermal is expanding its hot rock activity to shallower (and cheaper to develop) areas in Indonesia, where the government pays a higher, guaranteed tariff for energy, as well as supplying carbon credits.Solco supplies solar panels and pumps. It's profitable but will be hurt by the slowdown in solar roof installations in NSW.Not to be overlooked are AGL and Origin, which have wind and solar farms waste recycler Sims Metal and Lynas Corporation, which mines rare earths that are essential for batteries used for storing energy from wind turbines.Answers to the taxing questionsHow will a carbon tax cut pollution?Coal-fired power generators, the worst polluters, won't be able to afford to buy carbon permits which gradually become harder to get, so they'll have to switch to gas and renewable energy. Or close. Remember we're talking 30 years.Sure but how can we possibly go from a 5 per cent (in 2020) to an 80 per cent reduction 30 years on?Simple. The carbon price will rise by the inflation rate plus 2.5 per cent a year. Once the ETS or "cap-and-trade" system starts, the price will reach whatever it takes to get there. Treasury's guess is $131 a tonne in today's prices.How do we know less carbon dioxide will stop global warming?It's a greenhouse emission. If it is controlled then over time "it might slow the rate of increase" is the most the prime minister is promising.Why will producers change their ways when it's consumers who'll pay?Because there's a bigger profit for them if they do. They'll pass on the price initially but they won't be able to when a permit costs $131 a tonne. It's in their interests over time to re-engineer so they pollute less and so buy fewer permits.Why should we go first?Because we'll find a cheaper way of doing it and get a head start in the technology and adaptation. The Productivity Commission says there are 1000 different anti-emissions policies around the world and they're all less efficient and hence more expensive than a price on carbon.Since polluters will be able to buy carbon permits on the international black, I mean, green market, what's the point if they can go on polluting?Ah but those international sellers had to cut pollution to obtain their permits. Since we all share the same air, it doesn't matter where the emissions are cut, just so long as they are.When will we start to see results?Not for ages.Will the coal industry close?No way. The problem isn't digging up coal, it's what's done with it. China and India buy most of our coal, so any pollution created is for them to fix. By the way, the government says India is already taxing coal.If electricity prices are already soaring, what on earth will a carbon tax after July 1 do to them?Replacing ageing infrastructure to cope with peak loads and the 20 per cent renewable energy by 2020 target (which, don't forget, all political sides support) are to blame. This will get worse as power gets greener before 2020.Whatever. Won't higher prices make Australia less competitive?Too right, although Treasury claims the rises will only be marginal. Some of our competitors will be burdened with less efficient schemes as well. The government says we'll get a head start on making renewable technologies work.What's to stop profiteering?Competition from non-carbon-tax countries for one thing. A fine of up to $1.1 million each time you pollute for another.All right but they can still legitimately pass on the cost of a carbon tax, can't they? Hmm?Yes, but not all of them. They have competitors and we can buy the cheapest product or service, so there's a limit to how much they can pass on.Doesn't having compensation cancel out the carbon tax, making the exercise pointless?You'd think so. But as some products and services become dearer the budget-conscious among us will switch to something cheaper. Besides, most of the compensation isn't indexed.Will there be a carbon credit for recycling?No. Julia Gillard says "we don't know how to do it yet".